Slash and burn, then slash some more

MIKE Parton's answer to the problems of Marconi is to slash, slash and slash again. There must be real worry that, when and if the recovery in the telecoms equipment market does come, the former GEC will be so much reduced it will never be more than a weak bit part player.

In the effort to put its finances in shape, the group has been engaged in an extraordinary fire sale of assets. This cut net debt from a peak £4.4bn last year to £2.9bn, including last week's disposal of inkjet printing for £277m. It has been surprisingly successful in making these sales in markets that favour the buyers.

Looked at with a clear head, the strategy seems suspect. Marconi is selling off the only profitable parts left of the old GEC, with their positive cash flow, in the vague hope that, some time in the future, the telecoms equipment business will come good. The dangers of that are becoming only too apparent as Parton and his team postpone the date of a telecoms recovery from the second half of next year to 2003.

Marconi would argue that it had no choice as it looked down the barrel of a gun and faced possible administration. Parton appears confident that it 'will survive'.

Certainly, it is buying itself time through disposals and the reduction in its international workforce. The latest proposed cuts of 4,000 jobs take the total to 13,000 since Marconi was enveloped by crisis last July.

This is par for the course in an industry where slash and burn has become the norm (American rival Lucent has cut half of its workforce). In Marconi's case, there is a race against the clock. Despite the job cuts, cash flow is still negative, with another £45m disappearing out the back door in the third quarter when the operating loss was £130m.

With the losses worsening, overall sales falling, telecoms recovery postponed and a £2.2bn debt repayment deadline looming in March 2003, it is no wonder that analysts who saw Marconi as a recovery stock are changing their minds.

Stabilising the finances is critical. But if, in the process, good businesses are jettisoned and jobs are destroyed to remain part of an overcrowded industry, one has to ask if any of it was worthwhile. Former chief executive Lord Simpson and his chosen successor, John Mayo, left the hapless Parton an impossible legacy.

Rate puzzle BRITISH financial markets are still signalling a sharp rise in interest rates in 2002, despite a benign outlook for inflation.

If the futures markets are correct, we will be looking at base rates of 5.25% by this time next year, 1.25% higher than they are at present. That would mean the Monetary Policy Committee voting five times to increase interest rates at a time when underlying inflation is undershooting the target of 2.5% set for the Bank of England by the Treasury.

In much the same way as the consumption and manufacturing parts of the economy are moving in dramatically different directions, so are the components of inflation.

Goods prices are 0.3% lower than a year ago, whereas the price of services is climbing by 6%. Given that the make-up of the index is dominated by the goods sector, it is quite possible that inflation dangers arising from the consumer boom are being understated.

Even so, it is a long journey from the lowest headline inflation rate since March 1960 to the kind of interest rates being predicted on the futures market. The predictions seem particularly out of kilter when one looks across the Atlantic.

There, the futures markets have taken fright at Fed chairman Alan Greenspan's latest elliptical pronouncements. It is possible that US interest rates could end the year lower than the 2% at which they began.

That points to a longer and deeper US recession than expected, and makes it less likely that the Bank of England will swim against the global tide raising interest rates aggressively.

Dead parrots SO, 13 years after the event, the bold band of despots at the Accountants' Joint Disciplinary Tribunal have come down hard on member firm Stoy Hayward for its careless audit of Asil Nadir's Polly Peck. There are fines and the auditing equivalent of community service.

Contrast this with events across the Atlantic, where accounting firm Andersen, within weeks of Enron's collapse, has fired the five auditors most directly responsible for missing the irregularities at the energy group. So much for the speed of retribution among Britain's cloistered professionals.